overview

Inverse Condemnation and How It Impacts Property Values

PHOTOGRAPH COURTESY OF COSTAR AND USED WITH PERMISSION

Inverse condemnation. Police power. Eminent domain. These terms can be confusing or, quite possibly, you are not familiar with them at all. So, let’s define them, and then I’ll attempt to explain why you should be aware of their impact on property values.

Inverse condemnation – A cause of action against a government agency to recover the value of property taken by the agency, though no formal exercise of the power of eminent domain has been completed. (Black’s Law Dictionary, p. 740, fifth edition, 1979).

Police power – The right of government through which property is regulated to protect public safety, health, morals, and general welfare. (The Dictionary of Real Estate Appraisal, p. 214, fourth edition, 2002).

Eminent domain - The right of government to take private property for public use upon the payment of just compensation. (ibid, p. 95).

A very simple illustration of inverse condemnation is when the government takes your property but fails to compensate you. For example, if you live in an area which recently flooded and your home flooded as well, you may think the government took your property without compensation. I recently spoke with an appraiser who opined that the flooding of homes that occurred after the release of water from the Barker and Addicks reservoirs on August 28th was an example of a non-compensatory police power - that is to say, a taking without compensation. Governments normally have used the power of eminent domain to take private property for the public good, but they have compensated the property owner for the taken property. This provides land and space for our streets, roadways, highways, parks, bus stops and curb cuts. Whether it is through negligence, emergency preservation of a city, or any other means, the government is required under the “Takings Clause” of the Fifth Amendment to provide “just compensation.” This is defined by the Supreme Court (United States v. 50 Acres of Land, 1948) as “the market value of the property at the time of the taking contemporaneously paid in money.”

If your property was flooded as a result of the actions of a government entity, you should consult with a real estate appraiser to better understand the value of your residence or business before and after the flooding. Only a qualified attorney can explain your rights and whether you are entitled to compensation from the government.

Currently the estimate is that almost 200,000 homes were damaged as a result of Hurricane Harvey and its aftermath. Tens of thousands of claims have been filed and millions of dollars in advance payments have been made. My personal observation of the residential area west of Gessner and south of I-10 is that devastation and property loss is significant. Homeowners who were forced to leave their homes will migrate to Class A apartment properties which could result in both higher occupancies and increasing rents. Pressure to develop new multifamily properties will drive up land prices, and the shortage of labor will likely drive up labor costs. If more stringent drainage and flood control restrictions are created, that will also put upward pressure on costs and rents.

Lastly, it is important to know what percentage of commercial properties in Houston may have been impacted by the flooding related to Hurricane Harvey. CoStar has compiled a list of office, retail, and multifamily property types which we have summarized below with flood zone locations.

Property Type

Floodplain

Count

Percentage of Total

Office

9,393

23%

100-year or High Risk

608

6%

500-year

688

7%

None or Minimal Flooding Risk

8,097

65%

Retail

26,331

65%

100-year or High Risk

2,175

8%

500-year

2,315

9%

None or Minimal Flooding Risk

21,841

83%

Multi-family

4,561

11%

100-year or High Risk

460

10%

500-year

449

10%

None or Minimal Flooding Risk

3,652

80%

Total properties

40,285

In conclusion, the flooding which occurred before the water was released from the reservoirs, coupled with the water release from the reservoir on August 28th had a significant impact on approximately 200,000 structures or more. The loss in value is unknown at this time, and whether or not property owners are justly compensated is another unknown. What is known, is that the flooding and value loss is widespread and significant. The answer will come soon as the court system handles the matter.